Fed leaves interest rates unchanged
WASHINGTON — Ben Bernanke and his co-pilots at the Federal Reserve are trying to bring about a safe landing for the U.S. economy.
The Fed’s goal is for the economy to slow enough to reduce pressures from inflation, but not so much that it crashes and falls into recession.
For now, economists are keeping their fingers crossed that a smooth touchdown can be made, although the central bank in the past hasn’t always been successful.
To this end, Fed Chairman Bernanke and his colleagues, in a 10-1 vote Wednesday, decided to stay the course for their second meeting in a row and leave interest rates alone. They suggested that slowing economic activity eventually will lessen inflationary pressures.
“What else is there for them to do when inflation is easing and the economy appears on course toward a classic soft landing? Nothing. So Fed policymakers are heading back to their offices and Sudoku,” quipped Bernard Baumohl, executive director of the Economic Outlook Group.
With economic growth moderating and once-surging energy prices now receding, all but one of the Fed’s voting members felt comfortable holding a key interest rate at 5.25 percent. That meant commercial banks’ prime interest rate — for certain credit cards, home equity lines of credit and other loans — would stay at 8.25 percent.
“The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,” the policymakers said in a brief statement released after their meeting.
Wild cards in the safe-landing scenario: energy prices and the cooling in the housing market after a five-year boom.
After surging past $3 a gallon in many areas, gasoline prices are now hovering around $2.50 a gallon nationwide. Oil prices closed at a record $77.03 a barrel in mid-July, but now are below $61.
The risk of inflation flaring up is still on the Fed’s radar screen. But Fed policymakers believe inflation will calm down and they cited the drop in energy prices as a reason for optimism.
“Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations and the cumulative effects” of the Fed’s 17 rate increases since June 2004, according to the statement.
The Fed’s decision Wednesday gives borrowers more time to catch their breath after all those increases and savers a chance to lock in respectable rates.